Following last week’s declaration of special first-quarter 2011 dividend and an additional share repurchase, Wells Fargo & Company (WFC) sold 10-year notes in dollars for the first time since 2007.
Wells Fargo sold the 10- year issue worth $2.5 billion at a coupon rate of 4.6%. The bonds will mature in April 2021, yielding 130 basis points more than Treasuries. The new notes has been rated A1 by Moody’s Investors Service and AA- by Standard & Poor’s.
Previously, Wells Fargo sold 10-year notes in dollars in December 2007, issuing $3 billion of 5.625% securities.
The proceeds from the offering are intended to be used for general corporate purposes. Moreover, Wells Fargo may use the proceeds for the repayment of outstanding debt securities.
Last week, Wells Fargo’s board of directors approved aspecial first quarter 2011 cash dividend of 7 cents per share on its common stock. Combined with quarterly dividend of 5 cents per share declared in January 2011, the special dividend brings the total dividend to 12 cents. The increased dividend will be paid on March 31 to shareholders of record as of March 28.
The board of directors also augmented Wells Fargo’s share repurchase by additional 200 million. In January 2011, Wells Fargo submitted a capital plan to the Federal Reserve Board, including dividend hike, common stock repurchases, the redemption of certain trust preferred capital securities and the continued open market repurchases of common stock warrants.
All these actions mark the strength in Wells Fargo’s business model, reflecting the company’s commitment to return value to shareholders with its strong cash generation capabilities. The dividend increase and stock buyback followed Fed’s approval after the completion of stress tests for assessing the banks’ financial position.
Wells Fargo was one of the 19 banks that were subjected to “stress tests” conducted by the Federal Reserve. Due to the recession, the Fed had put restrictions on increasing banks’ dividends and share buybacks in exchange of the bailout money. Following the repayment of the bailout money, many banks started exerting pressure on the regulators to let them restore their dividends.
Banks that were subject to stress tests include JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB), Bank of America Corporation (BAC) and Citigroup Inc. (C).
We believe that with its diverse geographic and business mix, Wells Fargo is well positioned compared to its peers. The Wachovia acquisition and the demise of some smaller players helped it to garner a larger share in the mortgage markets. Yet, the recent financial regulations are anticipated to have a negative effect on the company’s top- and bottom-line results. Besides, costs associated with loan resolutions and loss mitigations are also expected to remain elevated in the near term.
Wells Fargo currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
Zacks Investment Research
